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Oil prices are holding, but for how long?

The average in 2012 so far is closer to $110 a barrel

Gulf News

In a few days’ time, we will be saying “that was the year that was” which could mean good, bad or in between, depending on one’s perspective.

As for oil producers, they could very well cautiously celebrate the end of a tumultuous year where the price of the Opec (Organisation of Petroleum Exporting Countries) basket of crude oils rose from about $107 (Dh392.9) a barrel at the beginning of the year to approximately $123 a barrel as an average for March before falling sharply to about $94 for the month of June.

At that time, there was the fear that prices are heading further downward but contrary to that, prices rose again and settled for the rest of the year in a range of $100 to $110 a barrel. The average in 2012 so far is closer to $110 a barrel, which is about $2 higher than 2011 and $30 higher than 2010.

Considering the state of the world economy, especially with respect to the sovereign debt situation in Europe, the slow recovery in the US, the high rate of unemployment in many industrial countries and even a relative slowdown in China and India, it is surprising how little oil prices were affected.

Oil demand fell in North America and Europe and rose slowly in other industrial countries. OECD (Organisation for Economic Cooperation and Development) demand fell from 45.9 million barrels a day (mbd) in 2011 to 45.5mbd in 2012. World oil demand in general rose by a mere 0.8mbd or from 88mbd in 2011 to 88.8mbd in 2012. Supplies, however, were higher than demand growth by about one million barrels a day on average in 2012 and as a result, stocks in the industrial countries are well above the five-year average.

Turmoil supports prices

Against this background, oil prices got some support from geopolitical developments and the turmoil in some producing countries or in countries close to them and the fear that the situation could get worse. At the same time, the problems between Iran and the West with respect to the former’s nuclear programme are still active and sanctions have cut Iranian exports sharply though this is more than compensated by Opec’s over production.

Although oil demand in the fourth quarter of 2012 was stronger than expected due to some revival in China, which partially balanced the decline in Europe, both Opec and the International Energy Agency (IEA) are very cautious in their estimates of balances for next year.

Opec believes that economic worries will “continue to outweigh concerns about supply disruptions” while the IEA says that “relatively sluggish demand growth is forecast through 2013 as global economic expansion remains tepid.”

Therefore, both organisations forecast demand growth in 2013 of not more than 0.8mbd and 0.865mbd respectively over the level of 2012. The call on Opec oil, expected to be 30.1mbd in 2012, is likely to fall to 29.7mbd, according to Opec, and 29.8 mbd, according to the IEA.

In his opening address delivered to the Opec conference in Vienna on Wednesday, Abdul Kareem Luaibi Bahedh, Minister of Oil of Iraq and president of the conference, said: “We are faced with a period of continuing uncertainty about the oil market outlook” and “the lack of a clear vision on the economic front.” As expected, the conference declared: “Given the demand uncertainties, the conference decided to maintain the current production level of 30mbd.”

Cutting production

But the conference failed to point out the current overproduction of Opec and added: “The conference also agreed that member countries would, if necessary, take steps to ensure market balance and reasonable price levels for producers and consumers” which may be interpreted as the conference willingness to cut production if prices decline.

In the next few months, the market may get support from the new quantitative easing in the US where the Federal Reserves will pump $85 billion a month to support economic recovery in addition to keeping interest rates at the lowest level until a noticeable improvement in employment.

Many analysts, however, suggest that oil prices are at risk of a major correction next year due to sluggish demand, continued increase in US production, fuel efficiency improvements and an increase above the ceiling in Opec production.

The US also extended its waivers on financial sanctions for key purchasers of Iranian oil such as China, India, South Korea and Turkey which will probably increase Iran production or at least arrest its decline.

Deutsche Bank says the range of analyst forecasts for oil prices are at “extreme levels,” with $50 a barrel between the high and low ends. Therefore, prudence is in order as we make our wishes for the New Year.

— The writer is former head of the Energy Studies Department in Opec Secretariat in Vienna.